Why Crypto Exchanges Need AML

When using cryptocurrency exchanges, exchanges, payment services and some wallets, users are faced with compliance with AML rules. Among other measures, these rules include mandatory verification and provide the platform with the ability to freeze assets in case of violations. This often causes dissatisfaction among users who find that it is not possible to withdraw funds in USDT TRC20 or in any other currency and cryptocurrency.

What is AML

AML (anti-money laundering) is a set of measures and procedures aimed at combating illegal circulation of funds. AML policies on cryptocurrency exchanges help prevent illegal use of the platform, uphold the rule of law, and counter financial crime. Key practices within AML include:

  • Customer identity verification (KYC).
  • Supervision of financial transactions.
  • Detection and reporting of suspicious transactions.
  • Storage of records of transactions and personal data.
  • Training employees to detect illegal transactions.
  • Cooperation and provision of information to regulators.
  • The introduction of restrictions on transactions (limits, freezing of funds) for more thorough control.

Specific AML measures and restrictions depend on the jurisdiction in which the cryptocurrency exchange operates. That is why the country of registration is one of the key factors when choosing a platform and influences the rules for verifying transactions and setting limits.

How do AML, CFT and KYC relate to each other?

In the context of AML, the concepts CFT and KYC are often used. AML (Anti-Money Laundering) and CTF (Countering Financing of Terrorism) provide for almost the same actions, but in the first case, these measures are aimed at identifying possible illegal sources of income, and in the second, the client is checked for possible links with terrorist organizations and/or individuals with an appropriate reputation. Of course, the legal consequences for a user who falls under suspicion will be different.

The KYC mechanism is used as one of the transaction identification tools along with on-chain monitoring under both policies. The decision to register on a cryptocurrency exchange should be made after reading the AML/CFT/KYC policy. Please note that the presence or absence of KYC does not always indicate compliance or non-compliance with AML/CTF.

What Transactions are Subject to Blocking?

In case of violation of the AML rules, the cryptocurrency exchange may suspend both incoming (deposits) and outgoing (withdrawals) transactions. When evaluating these operations, 3 main factors are taken into account:

  • Members. Maximum verification of the parties to the transaction using on-chain data, banking data and other information that can be identified based on the selected payment or withdrawal methods.
  • History of interaction. Analysis of the interaction of the recipient/sender of assets with wallets from the sanctions lists, fraudulent addresses, hacker wallets and mixers. Interactions with high-risk addresses in the past increase the risk rating of the wallet.
  • Unusual activity. Identification of an inexplicable increase in the number of transactions and/or their volume. The definition of unusualness is based on previous user actions and is taken into account in conjunction with other signs of illegal transactions.

Based on these factors, transactions receive a risk rating. In some cases, both the transaction and the user’s account may be blocked immediately, in other cases, funds are temporarily frozen to clarify the circumstances. If the user’s activity on the exchange was limited to a one-time deposit replenishment, after which he partially exchange ETH to BTC and continues to trade, there will be no suspicions about him.

Why Crypto Exchanges Need AML

  • Compliance. Effective KYC/AML mechanisms are required to obtain a license and legally operate in many jurisdictions, including the US, EU, UAE and Hong Kong. Violation of this requirement may result in fines or a ban on activities in the country.
  • Investigation of crimes. Transaction monitoring software and the personal data collected from users can effectively investigate crimes involving digital assets and link transactions to real individuals. Exchanges typically provide transaction data to users at the request of law enforcement and tax authorities.
  • User protection. Regulated cryptocurrency exchanges strive to create a safe environment for users and protect them from interacting with scammers and prohibited platforms such as mixers.
  • Increasing confidence. A well-designed AML/CFT and KYC architecture enhances the reputation of the exchange in the eyes of users seeking legality and security, as well as in the eyes of regulators and law enforcement agencies. This leads to fewer checks and unjustified fears, as well as attracting more potential customers.
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